MARKETBEAT

OFFICE SNAPSHOT
WASHINGTON, D.C.
A Cushman & Wakefield Research Publication

Q2 2012

ECONOMIC OVERVIEW
Employment continues to grow in the Washington D.C. Metropolitan area with 39,200 jobs added to the region over the past year. Leisure/hospitality has been the best performing sector, followed by education and health services, which is also experiencing strong growth on a national level. The office-using sector has been adding jobs, but growth is much less robust than last year. The District’s unemployment rate, based on employment status of D.C. residents, improved to 9.3%, its lowest level in more than three years.

MARKET INDICATORS SOFTEN
Overall vacancy rates in the District ticked up for the third consecutive quarter, with 12.5% of office stock sitting vacant. Even the class A market, which had been steadily improving, experienced a slight increase in vacant space, due in part to the delivery of 1000 Connecticut Avenue NW. While it was about 85% preleased, its anchor tenant has yet to take occupancy. STATS ON THE GO
Q2 2011 Overall Vacancy Direct Asking Rents (psf/yr) YTD Leasing Activity (sf) 11.5% $51.40 3,163,349 Q2 2012 12.5% $51.40 2,099,566 Y-O-Y 12 MONTH CHANGE FORECAST 1.0 pp 0.0% -33.6%

ACTIVITY REMAINS SUBDUED
New leasing activity remained sluggish during the second quarter, and year-to-date has dropped by 34% compared to the same period last year. While many businesses are flush with cash, they are not implementing growth strategies, be it through investment or new hiring, due to persistent global economic uncertainties. In addition to economic woes both at home and abroad, the potential for massive federal budget cuts, or sequestration, starting on January 1, 2013 has business leaders on edge. Thus, the trend of short-term lease extensions and renewals continues. The health of the legal services industry, a main driver of the District’s economy, was once again put into question as the law firm of Dewey & LeBoeuf collapsed. Long-term trends in the industry including high price tags for recruits and aggressive growth through mergers have led to a potentially highly-levered business, in general, causing landlords to focus on concession packages and corresponding security deposit requirements. Over a year after Howrey collapsed, approximately 300,000 square feet (sf) of vacant space remains on the market at 1299 Pennsylvania Avenue NW. The Dewey & LeBoeuf space will add about 140,000 sf of space to the East End submarket once it’s fully vacated within the coming weeks and under the landlord’s control. No new leases over 100,000 sf were completed in the District. The largest lease was signed by the General Services Administration (GSA) on behalf of the Consumer Financial Protection Bureau for approximately 72,000 sf in the CBD (FHFA sublease space). The new bureau was established by The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dechert LLP committed to relocate its offices to 51,176 sf at 1900 K Street NW, reducing its footprint by about ten percent. Sullivan & Cromwell leased 49,549 sf at Carr Properties’ new project at 1700 New York Avenue NW, expected to deliver during the third quarter of 2013.
Cushman & Wakefield of Washington, D.C. 2001 K Street, NW, Suite 700 Washington, DC 20006 www.cushmanwakefield.com/knowledge

DIRECT RENTAL VS. VACANCY RATES
$54.00 $52.00 psf/yr $50.00 $48.00 $46.00 2008 2009 2010 2011 Q2 12 14.0% 12.0% 10.0% 8.0% 6.0%

DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

LEASING ACTIVITY
8.0 6.0 msf 4.0
5.2 4.5 5.8 4.8 2.1

2.0 0.0

2008

2009

2010

2011

2012 YTD

LEASING ACTIVITY

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. © 2012 Cushman & Wakefield, Inc. All rights reserved.

992

371

983

Absorption was slightly negative during the quarter, bringing the yearto-date total to negative 497,707 sf, with the core markets of the CBD and East End experiencing the greatest decreases in occupied space. During the second quarter, Ballard Spahr vacated a large block at The Homer Building in the East End. Space was also left behind by the National Association of Manufacturers at 1331 Pennsylvania Avenue NW and by Parsons at 1133 15th Street NW. Direct asking rents for all classes of space have remained flat over the past year, at $51.40 per square foot (psf). Asking rents for class A space have increased by 2.6% from the same time last year and are averaging $60.81 psf. In the CBD, class A asking rents increased by $2.35 psf since last quarter primarily due to a large block of space available for lease at the newly completed 1000 Connecticut Avenue NW. Asking rents certainly do not tell the whole story, however, as landlords have been reticent to reduce them while remaining generous with concession packages. Tenant improvements in class A space have topped out at $110 psf in 2012, with an average free rent period of about 7 months, based on at least a 10-year term. CLASS A VACANCY RATES BY SUBMARKET
20.0% 15.0%
11.1% 11.9% 17.8% 19.3% 20.8%

NEW CONSTRUCTION DELIVERIES
1,250 sf thousands 1,000 750 500 0 2011 2012 2013 2014
NEW CONSTRUCTION 0

250

SALES OF CORE PROPERTIES CONTINUE
Demand for office product in the District of Columbia remained resilient through the second quarter. Year-to-date sales volumes totaled $1.6 billion, down from last year’s levels but significantly stronger than the suburbs. Foreign buyers continue to focus downtown, particularly for trophy assets, although institutional and local/regional investors have also added assets to their D.C. portfolios. The highest price per square foot this quarter was paid by Jamestown Properties, who purchased 733 10th Street NW from Skanska for $138.3 million, about $818 psf. The 171,171-sf property, built just last year, is nearly fully occupied. California-based Commonwealth Partners closed on Hamilton Square (600 14th Street NW), its first direct acquisition in the D.C. marketplace, for $198 million, just under $800 psf. Both properties traded at sub-5% cap rates. While pricing has been robust for trophy and class A assets, a widening gap exists between this product type and other office property classes, with as much as a 150-basis point spread. Still, several core and core plus assets are currently under contract as demand shows no signs of waning.

8.4%

5.0%

Georgetown

NoMa

8.6%

10.0%

Uptown

East End

CBD

Riverfront Southwest

CLASS A OVERALL VACANCY RATES

OUTLOOK
While there seems to be little argument that the office market in the District is retrenching, prospects for the long-term are strong. The next 12-18 months will be challenging as businesses await the outcome of the European debt crisis, the U.S. Presidential election, and the process by which Federal budget cuts are implemented. While government may be shrinking overall, the fact is that any business which has dealings with the government, regulatory institutions, or lobbyists, must have a presence here in order to achieve its objectives. The recent wave of law firms and educational institutions setting up shop for the first time in the District illustrates this point. While the tech sector has never had a stronghold in D.C., the administration is taking active steps to attract and retain tech firms. A tax incentive package worth $32.5 million for Living Social to retain its headquarters here is well on its way to final approvals. Cushman & Wakefield expects vacancy rates to increase slightly, peaking at 13.0% next year before beginning a slow recovery. Elevated vacancy rates, caused by lackluster demand, reduced tenant occupancy footprints, and new construction will cause rents to continue to decrease before they flatten out next year. While the office market will experience a period of negative growth, private sector job growth is forecast for the region over the next several years. A stable job market coupled with a healthy housing market exemplify a Metro Area which is in much better shape than many other areas of the country.

STRONG TENANT APPETITE FOR NEW CONSTRUCTION
The 370,545-sf class A office property at 1000 Connecticut Avenue NW was completed during the second quarter, with Arent Fox as its anchor tenant, leasing 254,475 sf, which it will occupy later in the year. Tenant interest in the remaining availabilities in the building has been strong. Carr Properties broke ground on 1700 New York Avenue NW with substantial lease commitments already in place: over 49,000 sf from Sullivan & Cromwell, LLP and about 30,000 sf from The Smith Group, who is designing the property. The 120,000-sf class A property, which will have sweeping views of the National Mall, is expected to deliver during the third quarter of 2013. Construction is moving along at City Center as Covington & Burling signed a letter of intent for about 415,000 sf. If the deal closes, one of the District’s largest law firms will move into its new space in the East End in early 2014. Constitution Square Three has yet to secure a lead tenant. The 400,000-sf spec property is scheduled to deliver at the end of next year in the tightest submarket in the District. Capitol Hill/NoMA has a direct vacancy rate of just 8.5% for all classes of space.

Cushman & Wakefield of Washington, D.C., Inc. 2001 K Street, NW, Suite 700 Washington, DC 20006 www.cushmanwakefield.com/knowledge

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. © 2012 Cushman & Wakefield, Inc. All rights reserved.

WASHINGTON, D.C.
SUBMARKET INVENTORY OVERALL VACANCY RATE 9.1% 10.8% 13.6% 12.7% 12.0% 16.4% 16.7% DIRECT VACANCY RATE 8.5% 9.6% 11.7% 11.2% 9.6% 16.1% 16.2% 47,300 501,142 1,355,448 120,744 57,705 1,661 15,356 YTD LEASING ACTIVITY UNDER YTD CONSTRUCTION / CONSTRUCTION RENOVATION COMPLETIONS 747,556 530,413 539,961 0 0 0 0 0 370,545 0 0 0 0 0 YTD DIRECT NET ABSORPTION 61,739 (185,455) (223,761) 1,223 (61,921) 77,563 (19,546) YTD OVERALL NET ABSORPTION 25,160 (201,885) (272,876) (1,593) (59,928) 52,683 (39,268) OVERALL WTD. AVG ALL CLASSES GROSS RENTAL RATE* $46.09 $54.32 $50.62 $42.58 $37.73 $52.83 $44.95 DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE* $55.71 $63.80 $62.63 $58.72 $43.02 $54.69 $47.70

Capitol Hill / NoMa East End CBD West End / Georgetown Uptown Southwest Capitol Riverfront

12,147,728 36,202,415 32,978,186 5,226,557 3,447,115 11,115,786 4,674,326

TOTALS

105,792,113 12.5%

11.2%

2,099,566

1,817,930 370,545

(350,161)

(497,707)

$50.28

$60.81

* RENTAL RATES REFLECT ASKING $PSF/YEAR

MARKET HIGHLIGHTS Significant Q2 2012 Lease Transactions
400-444 North Capitol Street NW* 1625 Eye Street NW 2025 M Street NW* 1900 K Street NW 600 14 Street NW* 1700 New York Avenue NW
th

SUBMARKET Capitol Hill / NoMa CBD CBD CBD East End CBD SUBMARKET East End East End CBD East End CBD Uptown

TENANT State Services Organization (SSO) Inc. Consumer Financial Protection Bureau Radio Free Asia Dechert LLP Pepper Hamilton LLP Sullivan & Cromwell LLP BUYER Commonwealth Partners Jamestown Properties The JBG Companies ASB Real Estate Investments / MRP Realty ELV Associates American University MAJOR TENANT Arent Fox LLP MAJOR TENANT Speculative Speculative Sullivan & Cromwell LLP

BUILDING CLASS B A C A A A PURCHASE PRICE / $PSF $198,000,000 / $797 $138,300,000 / $818 $64,750,000 / $419 $33,275,795 / $356 $45,500,000 / $498 $27,120,000/ $310 COMPLETION DATE Q2 2012 COMPLETION DATE Q3 2013 Q4 2013 Q3 2013

SQUARE FEET 273,848 72,324 68,927 51,176 51,102 49,549 SQUARE FEET 248,495 169,038 154,584 93,553 91,312 87,586 SQUARE FEET 370,545 SQUARE FEET 462,507 399,996 120,000

Significant Q2 2012 Sale Transactions
600 14th Street NW 733 10th Street NW 1233 20th Street NW 624 9 Street NW 1776 Massachusetts Avenue NW 4401 Connecticut Avenue NW
th

Significant Q2 2012 Construction Completions SUBMARKET
1000 Connecticut Avenue NW CBD SUBMARKET East End Capitol Hill / NoMa CBD

Significant Projects Under Construction
800 & 850 10th Street NW (CityCenter) 165 N Street NE 1700 New York Avenue NW

* RENEWAL - NOT INCLUDED IN LEASING ACTIVITY STATISTICS

Cushman & Wakefield of Washington, D.C., Inc. 2001 K Street, NW, Suite 700 Washington, DC 20006 www.cushmanwakefield.com/knowledge

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. © 2012 Cushman & Wakefield, Inc. All rights reserved.

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